Turn crypto regulatory compliance into a competitive advantage

Who are Notabene, for those who don’t know yet?

By using privacy-preserving technology, The notesits full-service software helps virtual asset service providers (VASPs) manage real-time regulatory and counterparty risk in virtual asset transactions. Financial institutions, crypto exchanges and custodians use our travel compliance solution to comply with international AML regulations and guidelines. Customers such as Luno, Bitso, Crypto.com, Bitstamp, Cross River Bank and more leverage our end-to-end travel compliance software to:

• identify virtual asset accounts,

• carry out mandated VASP due diligence, and

• manage the exchange of global travel rule transfers from one dashboard.

Our clients turn compliance into a competitive advantage while unlocking the flow of trillions of institutional dollars into the space. The notes aim to make safe and reliable crypto transactions a part of the everyday economy.

What does the introduction of requirements for travel rules look like worldwide?

In June 2022, the FATF issued a targeted update on the implementation of the FATF Virtual Asset Standards and VASPs (‘Update’) and reported that countries’ adoption of travel rule requirements is at an earlier stage compared to other components of crypto compliance. Only 29 of 98 responders enacted legislation, and only 11 began enforcing and monitoring compliance with the travel rules.

Unlike other components of crypto compliance (such as customer due diligence obligations), the different speed of enforcement of travel rule requirements across jurisdictions causes particular challenges for VASPs – these challenges have been coined the Sunrise Problem.

In 2022, Notabene saw a peak increase in adoption of travel rules by VASPs. This willingness to comply is also explicitly recognized by the FATF in the previously mentioned update.

The results of the State of Travel Rule Survey that Notabene ran back in October 2021 showed that most VASPs intended to comply with the travel rule by the end of Q2 2022. And this year proved that the VASPs’ forecasts were realistic. Within our network, we have seen a 2x increase in the number of transactions in just the last 90 days. This means that the number of crypto transactions for which VASPs send a corresponding Travel Rule message doubled in just one quarter.

Although travel rule requirements are still not uniformly mandated across jurisdictions, the industry is making significant progress toward compliance. This is a relevant data point for any VASP, regardless of whether travel rules are enforced in its jurisdiction: to continue trading with VASPs mandated to comply with the travel rule, VASPs must be ready to start engaging in travel rule flows. Notabene recently launched a Sunrise plan aimed at this use case.

What are some challenges related to the standardization of travel rule requirements?

The requirements for travel regulations vary significantly across jurisdictions, particularly when it comes to:

1. Current affairs de minimis thresholds (whether the travel rule is required for all transactions or only above a specific transaction amount); and

2. The extent of originator and recipient information that must be transferred.

These variations are not specific to Recommendation 16, “The Travel Rule”, – variations in the local implementation of the FATF recommendations are common and expected. What is special about the travel rule is that, unlike other compliance obligations (such as customer due diligence), the travel rule requires cooperation between VASPs. VASPs are subject to different requirements and must interact with each other.

For example, the recipient VASP may expect and be required to receive a particular data point about the Originator customer that the Originator VASP is not required – and may not be permitted – to share. Situations like these have the potential to create problems and transaction friction. In these cases, the recipient’s VASP will be obliged to request further information from the originator’s VASP. In order to transact with the receiving VASP, the originating VASP must share a broader scope of customer PII than is required under their jurisdiction.

The International Monetary Fund (IMF) recently highlighted the benefits of cross-border cooperation and collaboration in the regulatory approach to crypto. The highlight is important, especially in the context of travel regulations. Standardization of country-level requirements and industry-level best practices will be critical to the successful implementation of travel regulations worldwide.

Please provide some practical examples/projects that you have worked on to scale legal knowledge in the crypto industry.

From the very beginning, global compliance was embedded at the center of Notabene’s product design. Travel regulatory requirements vary across jurisdictions, so our product abstracts this complexity from VASPs. We embed travel regulatory requirements from different jurisdictions directly into our product to ensure that VASPs can comply with the requirements of the jurisdictions involved in each transaction.

We are committed to making travel policy information readily available to consumers and VASPs. Our content library includes 75 informative blog posts, 15 country-specific regulatory guidelines and two downloadable cryptocurrency regulatory guides as PDFs. In addition, we regularly summarize important regulatory updates on a global scale.

We organize jurisdictional workshops: VASPs based in the same jurisdiction all work against the same deadline to meet the same requirements. We create opportunities for compliance and legal professionals in VASPs to gather and discuss their interpretation of the requirements that apply and how they plan to build these requirements into their processes and policies.

In addition, we are constantly working to facilitate the standardization of best practice across the industry. We run monthly compliance deep dives where compliance and legal professionals from VASPs across jurisdictions come together to discuss specific topics ranging from operational/strategic topics such as how to handle non-host wallet transactions and counterparty VASP due diligence best practices practice to knowledge-sharing sessions around new relevant legislation, such as the EU’s transfer of funds regulation.

How will the legal framework surrounding crypto evolve over the next period?

I expect to see a big push for travel policy adoption and enforcement over the next few quarters. The FATF recently highlighted an “immediate need for jurisdictions to move forward in this area”. This year’s spotlight on crypto sanctions compliance – first with the speculation about whether crypto could be instrumentalized as a means of evading sanctions imposed on Russia and more recently with the news of the sanctions imposed on Tornado Cash – highlights the importance of the Travel Rule for effectively managing counterparty risk in crypto transactions.

Without compliance with travel rules, VASPs are blind to the transaction counterparty.

In addition to the Travel Rule, we can expect developments in the regulation of stablecoins – an area of ​​particular interest due to the potential for mass adoption. The new, comprehensive EU framework already covers the topic of crypto stablecoins, MiCA, and recently made headlines in the US with the proposed two-year ban on algorithmic stablecoins. I also anticipate developments in decentralized finance – an area which, due to its distinctive characteristics, may require a rethinking of the existing regulatory frameworks, as recognized by the European Commission in their European Financial Stability and Integration Review 2022.

About Catarina Veloso

Catherine is the Legal Engineer at Notabene, acting as the compliance liaison between global crypto regulators and Notabene clients on their journey towards regulatory compliance. She works closely with Notabene’s product team to reflect the travel regulatory requirements in different jurisdictions.